When a business gives credit to a customer, they run a risk. That risk is small or big depending on a number of critical things…
There are a few mistakes that many businesses make when giving credit to their customers, and it costs them a lot.
Mistake Number 1 – Giving Credit Where Credit is Not Due
The first and most important is this – only giving credit where credit is due. If you sell goods or services to someone or a business with a poor track record of paying their obligations, then you have thrown cash away. You have not just worked for free, you have given away your goods, and the cost is more than you think.
A bad debt isn’t just the immediate loss of cash-flow. It is the hole you have dug that needs more sales to get to where you were before that bad debt.
This is how it works…
If you have a bad debt of $1,000 and your Gross Margin (sales less direct costs of goods sold) is, let’s say, 30%, then you must get $3,333 in sales to make up for the $1,000 bad debt.
To show how that works, just work the numbers backwards. You lose $1,000. This is now a bad debt expense. Your fixed costs just went up $1,000. You then must generate additional sales of $3,333 the next month. You have direct costs of 70%, or $3,333 x 70% = $2,333. Subtracting your direct costs of $2,333 from sales of $3,333 leaves you $1,000 in gross profit, just enough to cover your bad debt of $1,000.
So, you lost $3,333 not $1,000. Ouch.
The moral of the story is – do not give credit where credit is not due. Do your homework.
Mistake Number 2 – Sending out Sloppy, Inaccurate Invoices
The second big mistake some businesses make is to not have a system of creating accurate invoices. It could be they haven’t taken the time to design a good accounting system, or they have the wrong people doing order entry. Or the invoice layout could be confusing and prone to errors.
Nothing will slow down your customers paying you more than an inaccurate invoice.
Think about it. What do you do when you get a bill that is wrong?
Do you adjust it, and send in the correct amount? Or perhaps sit on it for a while. You will likely call the company (a tad peeved) and demand a new invoice.
All this takes time, and your customers slow down their payments.
They stop trusting your invoices too, and next time may pay you more slowly.
Mistake Number 3 – Sending Invoices Late
You must make sure to get those invoices out fast! As fast as possible. As soon as the goods or services are performed, the invoices should be given.
These days many people use emails to send invoices and give their customers the option to pay online with the click of a button.
The slower you get the invoice out the longer the return of cash into your bank account.
The other problem is that if your customer disputes anything on that invoice, you want that to happen when the transaction is still fresh in their mind.
Mistake Number 4 – Waiting Too Long to Follow-Up
Many businesses make the mistake that they should start following up with an invoice after they don’t pay in 30 days. This is wrong…
You should follow-up immediately.
The follow-up can be a soft touch – just checking in to see if they received your invoice and if they had any questions.
One little extra step we used to do in our business is this – we would send out our invoices inside a really nice Thank You card. Inside the card we wrote something like, “we really appreciate your timely payment which allows us to give you the awesome service you deserve…”.
What? Thanking someone before they paid?
Yes, exactly, and most important, the rate of turnaround went up dramatically! We got paid much, much faster.
Mistake Number 5 – Not Following Up Enough, or Too Aggressively
If you have a problem account, the next mistake people make is they don’t follow up enough.
Or, when they do follow-up it is too aggressive and threatening.
Or, they just follow-up with emails, statements or letters.
To collect an older account, you must follow-up with persistence, firmness and kindness. You must follow-up often and use the phone.
The tone to adopt is one of professional kindness, and even compassion for the likely struggles your client/customer is dealing with, making it difficult to pay you perhaps.
The reason persistence, married to kindness, pays off here is that your invoice will move to the top of the heap if you are the one calling more often than any other creditor.
When you imbue kindness into your follow-up calls, then, people being people, there is a much higher chance of them paying you before anyone else.
Mistake Number 6 – Not Documenting Every Conversation
Not documenting everything is a big mistake. When you call to collect (and, by the way, when I say “you” it really should be someone on your Team trained to be kind, persistent, and detailed. You, as the business owner, should only call as a last resort), you must document everything.
The best follow-up is to do it like this:
- Make sure you are talking to the right person in the company who has the authority to authorize the bill for payment. They may be not be a cheque signer, but they will be the gate keeper, likely an accounts payable clerk, who will present the cheque for signature to the owner;
- Develop a friendly, yet professional, relationship with that person. Engage in some light small talk if appropriate;
- Ask questions!! Where in the queue is our invoice for payment? When can we expect payment? Could you kindly let me know if our cheque will be in your next cheque run? When is your next cheque run?
- One of the best comments to make is this: “like at your business, cash-flow is so critical to our ability to be in business. In that regard, I am drafting up a cash-flow for my boss, and I need an exact date to slot in when we will receive our cheque so I can give her an accurate update. Could you kindly give me that date so I can create an accurate summary for her/him?”
- Document every answer, and make sure you get specific dates!
- Then – and this is critically important – follow-up just before that date and ensure it is in the cheque run. Say things like, I can send a courier over to pick that cheque up that you promised for us on the 21st of February, as you refer to your notes.
Mistake Number 7 – Not Linking What People Have Promised to Actions
For clients who are really struggling, it may take 1-2 or even more cheque runs before it gets slotted in. Eventually people cannot live with being out of integrity, of saying they will pay on a certain date, and then not doing it, and especially when you are there to remind them!
Strangely enough, we have found that as long as you remain calm, and professional, the overwhelming majority of customers actually respect you for the persistent follow-up! They are even learning something from you to apply to collecting their own outstanding receivables.
People like paying people they like, so your persistent, kind, yet firm calls get actioned quicker than the nasty calls they are likely getting from super upset people.
Here is s summary of the top mistakes to avoid in managing your accounts receivable:
- Do NOT give credit to businesses or people with poor credit ratings. You are better off losing a sale than having a bad debt.
- Do NOT make the mistake of having sloppy invoices that are not accurate. Make sure a detailed person is sending out correct invoices to your customers. This slows down the payment cycle.
- Do NOT wait to invoice. The key principle is to invoice as close to the transaction time as possible.
- Do NOT make the mistake of waiting to follow-up with new customers, or ones you think might be slow to pay. Follow-up starts immediately.
- Do NOT be aggressive in collections. Be persistent, kind, firm and professional.
- Do NOT be vague in your calls or accept non-specific answers from your customers. Ask enough detailed, specific questions to get dates and promises. Write them down.
- Do NOT forget to use your notes on follow-up calls. “Last time we spoke you promised the cheque would be in this cheque run. May I send a courier over to pick it up?”
- Do NOT forget to hold people to their inner integrity. People naturally want to be their word. Hold them to their word.
Thanks for reading…